T-Bill Ladder Strategy: How to Build One in 2024

Larry, Managing Editor

t bill ladder

With interest rates still elevated, investors are not only buying U.S. Treasury Bills to generate over 5% annual yield, but they’re also building T-Bill ladders to take advantage of a less often used investment strategy that provides a steady stream of passive income while also giving you access to your cash.

In this article, we’ll break down the steps to create your T-Bill ladder and manage it effectively. Plus, we’ll compare this strategy with other investment options to help you make informed decisions.

Understanding the T-Bill Ladder Strategy

Treasury bills (T-bills) are short-term debt instruments issued by the U.S. government to fund its short-term needs. They are typically issued for a duration of one year or less, ranging from 4 weeks to 52 weeks. T-bills are considered one of the lowest-risk investments since they are backed by the full faith and credit of the government. They are sold at a discount to their face value and do not pay regular interest. Instead, investors earn a return by purchasing the bills at a discount and receiving the full face value when they mature. 

By creating a ladder of T-bills with staggered maturities, investors can take advantage of rising interest rates and potentially increase their overall yield. This strategy allows for flexibility, as investors can easily access their funds when needed or reinvest in higher-yielding T-bills as rates change.

What is a T-Bill Ladder?

We can utilize a T-Bill ladder strategy to ensure a steady income stream by spreading our T-bills across various maturity dates. This creates a T-Bill portfolio that matures at regular intervals. By doing this, we generate consistent cash flow as a portion of our portfolio matures every few months.

The T-bill ladder strategy also offers the advantage of liquidity and the ability to take advantage of rising interest rates. As terms expire, we have the flexibility to reinvest at higher rates or allocate funds elsewhere.

Additionally, by diversifying our investments across different maturity dates, we can reduce the risk associated with having all our assets tied to a single maturity date.

You can buy Treasury bills from major brokerages, which also provide tools to build a T-Bill ladder.

What Are the Benefits of Building a T-Bill Ladder?

By building a T-Bill ladder, we can enjoy the benefits of earning higher interest rates while maintaining liquidity and diversifying our investment portfolio. This strategy allows us to access our cash regularly without having to sell our entire portfolio.

Here are the major benefits of a T-Bill ladder:

  • Higher Interest Rates: Building a T-Bill ladder allows investors to earn higher interest rates compared to keeping money in traditional savings accounts. Over time, this can lead to significant earnings, especially if interest rates rise.
  • Maintained Liquidity: One of the primary advantages of a T-Bill ladder is the ability to access cash regularly. Investors don’t need to sell their entire portfolio to access funds, ensuring that money is always available when needed.
  • Diversification: A T-Bill ladder spreads investments across various maturity dates. This diversification reduces the risk associated with any single investment or maturity date.
  • Mitigation of Interest Rate Risk: In fluctuating markets, like 2024, interest rates can be unpredictable. By spreading investments across different maturity dates, investors can mitigate the risk of adverse interest rate movements.
  • Flexibility: If interest rates rise, investors can take advantage by reinvesting in higher-yielding Treasury Bills as they mature. Conversely, if rates decrease, money is already locked in at a higher rate through the purchase of longer-term Treasury Bills.
  • Predictable Income Stream: As T-Bills mature, both the principal and interest payments can be reinvested. This creates a consistent and predictable income stream for investors, ensuring a steady flow of returns.
  • Systematic Approach: Building a T-Bill ladder is a structured and systematic approach to investing. This strategy offers both stability in uncertain times and the potential for increased returns over the long term.

What Are the Disadvantages of Building a T-Bill Ladder?

The biggest disadvantage of T-Bill ladders is when you compare the potential returns of other investments. While T-Bills are virtually risk-free, since the U.S. government guarantees the repayment of all Treasuries, Treasury bills may not offer returns that you see with stocks or other riskier investments.

Here are some of the things to be careful of when building a T-Bill ladder:

  • Lower Potential Returns: While T-Bill ladders offer stability, they might provide lower returns compared to other investment vehicles like stocks or corporate bonds.
  • Requires Active Management: Building and maintaining a T-Bill ladder requires regular attention and management. Investors need to reinvest proceeds from maturing T-Bills. This can sometimes be done automatically with your brokerage.
  • Limited to Short-Term Investments: T-Bills are short-term securities, typically with maturities ranging from a few days to one year. This limits the ladder’s ability to capture long-term interest rate trends or benefits. This can be solved by including Treasury Notes and Treasury Bonds, which have terms of 20 years or more.
  • Interest Rate Risk Still Present: While laddering mitigates some interest rate risk, it doesn’t eliminate it entirely. If all T-Bills in a ladder were purchased during a period of higher rates and rates subsequently fell, the overall returns could be lower than anticipated.
  • Inflation Risk: The returns from T-Bills might not keep pace with inflation, especially in high inflationary periods.

How to Build a T-Bill Ladder in 2024

Building a Treasury bill (T-Bill) ladder in 2024 requires a strategic approach, especially in the context of rising interest rates. This guide will walk you through the process step by step, ensuring you make informed decisions at each stage.

Step 1: Define Your Financial Objectives for the T-Bill Ladder

Before diving into the specifics, it’s essential to have a clear understanding of your financial objectives. This clarity will guide the structure and parameters of your T-Bill ladder.

  • Investment Amount: Determine the total sum you’re willing to invest in T-bills. This could be a portion of your savings or a specific amount set aside for this purpose.
  • Ladder Duration: Your financial needs will dictate the duration of your ladder. For instance, if you’re planning significant expenditures in the near future, like buying a car or a home, a shorter ladder duration might be more suitable. Conversely, if you don’t foresee any large immediate expenses, you can opt for a longer ladder duration, extending up to 52 weeks.

Step 2: Decide on the Structure of Your T-Bill Ladder

The structure of your ladder will be influenced by the number of T-bills you intend to purchase and their respective maturity dates.

  • Number of Rungs: Each T-Bill can be thought of as a “rung” on your ladder. Given that the minimum purchase price for a T-Bill is $1,000, a $5,000 investment would allow for a ladder with up to five rungs.
  • Flexibility vs. Liquidity: A more extensive ladder, comprising numerous T-bills, offers increased flexibility and potentially shorter investment terms. However, it demands a more substantial capital outlay. If liquidity is a priority for you, a smaller ladder with fewer T-bills might be more appropriate.

Step 3: Handpick the Treasury Bills for Your Ladder

The success of your T-Bill ladder hinges on the careful selection of the T-bills themselves. Here’s what you need to consider:

  • Maturity Dates: Strategically stagger the maturity dates of the T-bills in your ladder. This ensures you receive a consistent income stream and can reinvest or use the funds as they mature.
  • Interest Rates: In a scenario of rising interest rates, it’s crucial to compare the rates offered by different T-bills. Naturally, higher interest rates will yield better returns but always weigh this against other factors like maturity dates and your financial goals.
  • Diversification: Just as with any investment strategy, diversification is key. Spread your investment across a variety of Treasury Bills to mitigate risks and ensure a balanced portfolio.

By following these steps, you’ll be well-equipped to build a robust T-Bill ladder in 2024, tailored to your financial needs and the prevailing economic climate.

Example of a T-Bill Ladder

Let’s put this into practice by exploring an example of a T-Bill ladder with five rungs. 

For illustrative purposes, let’s say an investor starts with a total of $50,000, and creates a T-Bill ladder by allocating $10,000 to each of the five different maturities.

The investor purchases:

  • A four-week bill with an annualized rate of 5.4%. They pay approximately $9,896 and will receive $10,000 upon maturity. (T-Bills are bought at a discount.)
  • An eight-week bill with an annualized rate of 5.43%. They pay approximately $9,791 and will receive $10,000 upon maturity.
  • A 13-week bill with an annualized rate of 5.49%. They pay approximately $9,654 and will receive $10,000 upon maturity.
  • A 17-week bill with an annualized rate of 5.53%. They pay approximately $9,548 and will receive $10,000 upon maturity.
  • A 26-week bill with an annualized rate of 5.54%. They pay approximately $9,289 and will receive $10,000 upon maturity.

When the four-week bill matures, the investor receives $10,000. They then buy a new 26-week bill with this amount, hoping to capitalize on the highest rate of 5.54%.

As the eight-week bill matures, the investor gets back $10,000. This is reinvested into another new 26-week bill at the 5.54% rate.

Upon the 13-week bill’s maturity, the investor collects $10,000. They continue the strategy by rolling this amount into yet another 26-week bill at the 5.54% rate.

Similarly, when the 17-week bill matures, the investor receives $10,000. Without hesitation, they reinvest this sum into a fresh 26-week bill, again at the 5.54% rate.

By the time the first 26-week bill matures, the investor has a ladder of 26-week Treasuries, with one maturing every few weeks. Each matured bill is consistently rolled over into another 26-week T-bill at the prevailing rate.

This systematic approach can be sustained until market rates begin to drop, the investor requires immediate cash, or they identify a more lucrative investment opportunity. Through this method, the investor not only ensures a steady income stream but also capitalizes on the highest available interest rates.

Managing Your T-Bill Ladder

Effectively managing your T-Bill ladder requires a strategic approach.

  1. Reinvesting Matured T-Bills: The reinvestment of funds from matured bills is essential for optimizing returns.
  2. Monitoring Maturity Dates: Stay on top of the maturity dates, and tweak your ladder in response to market shifts.

T-Bill Reinvestment Strategies

A central tactic for T-Bill ladders involves reinvesting the proceeds of matured T-bills into longer-duration options, aiming for higher yields. This can capitalize on rising interest rates and potentially boost income. When deciding on reinvestment:

  • Review Current Interest Rates: Understand current rates and their expected trajectory to decide on longer-term reinvestments.
  • Determine Risk Appetite: Recognize that longer-duration options can be riskier than T-bills. Ascertain your comfort level with potential value fluctuations.
  • Align with Investment Objectives: Match your reinvestment strategy with your financial targets and duration of investment. Longer durations are more apt for extended investment spans, whereas short-term is fitting for limited timelines.

Reinvesting matured T-bill proceeds into longer-term options can heighten yields, but consider factors like interest rates, risk levels, and investment goals before proceeding.

Keeping Track of Maturity Dates

Regularly use digital calendars or brokerage accounts to monitor T-Bill maturity dates. This ensures that you reinvest on time.

Stay organized: With multiple maturity dates, organization is paramount. Use reminders for every maturity to not overlook reinvestment opportunities.

Some brokerages might offer a visual ladder overview, simplifying your tracking and decision-making process.

Adjusting Your Ladder as Market Conditions Change

Maintain agility in your T-Bill ladder strategy by staying attuned to market fluctuations:

  • Interest Rate Monitoring: Keep a close watch on interest rate trends. If rates look to increase, consider shortening your ladder. If a decline seems imminent, think about extending it.
  • Yield Curve Analysis: Examine yield curves for insights into maturity dates and yields. For instance, a steeper curve might favor shorter T-Bills, whereas a flatter one might lean towards longer durations.
  • Economic Forecast Awareness: Gauge the broader economic climate. If growth or inflation is on the horizon, a strategy emphasizing shorter-term T-Bills could offer flexibility to exploit future higher yields.

Comparing T-Bill Ladder with Other Investment Options

When comparing a T-Bill ladder with other investment options, it’s important to consider the advantages and disadvantages of each.

A T-Bill ladder offers the benefit of safety and liquidity, as Treasury bills are backed by the U.S. government and can be easily bought and sold.

However, when compared to a CD ladder, T-Bills may have lower yields, while mutual funds and money market funds offer the potential for higher returns but also come with higher risks.

It’s essential to weigh the trade-offs and align investment goals with the appropriate strategy.

T-Bill Ladder vs. CD Ladder

Choosing between a T-Bill ladder and a brokered CD ladder should reflect your financial objectives and risk tolerance:

  • T-Bill Ladder:
    • Security: Distinct for its government-backed assurance.
    • Duration: Typically spans from a few days to one year.
    • Yields: Returns are based on the difference between purchase price and face value at maturity. 
    • Tax Perks: T-Bills stand out for their exemption from state and local taxes.
    • Scheduled Liquidity: As each Treasury bill matures, there’s an option to reinvest or use the funds.
  • CD Ladder:
    • Duration Choices: CDs come in various durations, from a few months to over a decade, allowing tailored investment strategies.
    • Predictable Yields: Interest rates are set at the onset, providing a known return.
    • Scheduled Liquidity: As each CD matures, there’s an option to reinvest or use the funds. However, early withdrawals might come with penalties, although this is uncommon with brokered CDs.
    • Insured up to $250,000: Each CD per bank is insured up to $250,000 by the FDIC.

If state tax savings and direct U.S. government backing are important, a T-Bill ladder could be more appealing. Conversely, if fixed, potentially higher interest rates and a wider range of durations are desired, a CD ladder might be more fitting. Brokered CD ladders have more flexibility with maturities and better rates than building one with bank CDs, with expanded FDIC coverage.

T-Bill Ladder vs. Mutual Funds

The T-Bill ladder offers lower returns compared to mutual funds, but it provides a safer investment option with the government’s full faith and credit backing. Mutual funds, on the other hand, cater to a broader spectrum of risk and return profiles, offering diversification and potentially higher yields, albeit with increased exposure to market fluctuations. Mutual funds allow for diversification and the potential for capital growth and income, they also carry the risk of fluctuating values based on the performance of underlying assets.

T-Bill Ladder vs. Money Market Funds

When weighing the benefits of a T-Bill ladder against money market funds, the T-Bill ladder often emerges as the preferred choice due to its superior yield potential and the security offered by government backing. Money market funds typically hold a large amount of Treasury bills, but may underperform due to fund management fees. Here’s a detailed comparison:

T-Bill Ladder:

  • Liquidity: T-Bills offer notable liquidity. Investors can easily sell them before maturity in the secondary market or await their short-term maturity.
  • Interest Rates: With the current rates showcasing a yield of 5.5%*, T-Bills present a favorable avenue for those seeking higher short-term returns.
  • Tax Advantages: Interest income generated from T-Bills has an edge, being exempt from state and local taxes. This can result in substantial tax savings, especially for those in high-tax states.
  • Safety & Risks: T-Bills come with the full backing of the U.S. government, which translates to minimal risk and high safety.

Money Market Funds:

  • Liquidity: These funds do ensure liquidity, but the convenience and immediacy might not rival that of T-Bills, depending on the specific fund and platform.
  • Interest Rates: Some money market funds might offer slightly lower returns compared to T-Bills, typically due to fund management fees.
  • Tax Considerations: Unlike T-Bills, the interest from money market funds is taxable at all levels, potentially reducing the effective return.
  • Safety & Risks: While generally considered safe, money market funds offer SIPC insurance that covers up to $500,000. They lack the absolute guarantee of government backing inherent to T-Bills.

Should You Build A T-Bill Ladder?

The T-Bill ladder is a compelling strategy for balancing liquidity and yields. Investors can reinvest proceeds from maturing T-Bills into the next, longer-term Treasury bill. A ladder is basically Warren Buffet and Berkshire Hathaway’s approach to its large cash pile. This is a sophisticated strategy, and the investor willing to proceed with a T-Bill ladder will benefit from increased liquidity and take advantage of higher yields across various T-Bill maturities.